Can AS Merko Ehitus (TAL:MRK1T) Continue To Grow Its Returns On Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at AS Merko Ehitus (TAL:MRK1T) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for AS Merko Ehitus:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = €21m ÷ (€270m - €92m) (Based on the trailing twelve months to September 2020).

So, AS Merko Ehitus has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Construction industry.

View our latest analysis for AS Merko Ehitus

In the above chart we have measured AS Merko Ehitus' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For AS Merko Ehitus Tell Us?

AS Merko Ehitus' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 53% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From AS Merko Ehitus' ROCE

To bring it all together, AS Merko Ehitus has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 50% return over the last five years. In light of that, we think it's worth looking further into this stock because if AS Merko Ehitus can keep these trends up, it could have a bright future ahead.

AS Merko Ehitus does have some risks though, and we've spotted 1 warning sign for AS Merko Ehitus that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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